EUR/USD and USD/JPY - why isn't there an inverse relationship?

[bcc9274]

I noticed that EUR/USD and USD/JPY have more of a positive correlation than a negative one.

It seems odd. If USD goes up, then EUR/USD should go down and USD/JPY should go up. And vice versa.

But I see a lot of time, when EUR/USD goes up, so does USD/JPY,. The same happens when EUR/USD goes down - USD/JPY goes down too.

Of course, it has to do with the EUR/JPY rate changing, but it seems strange that those two pairs would go up and down at the same time so frequently.

Why is that?

 

[spark123]

For these two pairs to be highly correlated, its not enough to look for the USD to lead the way. EUR and JPY are important majors which do not correlate well, as you can see by simply watching EURJPY which is trending nicely. That's why you can't expect a very high correlation.

 

[naked shorts]

GammaJammer,

What would you make of this recent occurance between the two pairs?

The complete reversal of the correlation, then reversion back to + correlation makes no sense to me (this happened during NFPs).

Why would the dollar reverse like that if the world is in risk seeking mode? The money is already in the US, waiting for oppotuniy to show its head... on such an oppotunity wouldn't the USD weaken?

 

[GammaJammer]

All depends on what, at that precise moment in time, is driving the pairs.

Around NFP (i.e. right around the release) it was all about risk. Better than expected US employment - world rosy again, lets all buy risk (eurjpy higher, in very very broad terms). You then also had the fact that US shorter end rates started to move North fairly perkily (usdjpy +ve, eurusd -ve). Add to that the fact that people alsayw trade the kneejerk headline reaction first on nfp and then analyse later (factoring in BDM, look deeper at stuff like participation rate, revisions to U-rate etc etc) and the number looked less fantastic. Upshot is that usdjpy held onto its gains that day, eurusd gave them up....

The theme that has started to be talked about for a couple of weeks now in the markets is the potential decoupling between the fate of the dollar and the global appetite for risk. I.e. the return of more selective risdk appetite, rather than people just blindly looking at the world as some big risk 'basket' and seeing equivalent moves in eurjpy, audjpy, gbpusd, eurchf, usdzar, eurpln, gold, oil etc etc etc every time the US economy lurches another zillionth of a percent higher or lower.

Bottom line is, the answer in these situations is NEVER as simple as people think (or want to think) and on Friday a loot of forces were at work, sometimes pulling together, sometimes in opposite directions. That's what makes it all fascinating (and occasionally downright infuriating).....

Hope that helps

GJ